The markets have enjoyed a nice move up from mid-August. This rally has been disbelieved most of the way up. We are just about at key resistance, where the sledding gets much more difficult from this point forward.

The SPX and the Dow are above their respective 50 and 200 day moving averages, while the Nasdaq is above its 50 day, but remains below its 200 day at ~1975. While OTC stocks have lagged the more conservative S&P500 and Dow Industrials since the most recent intermediate bottom (August 13), they now have stronger momentum and less resistance immediately overhead. That suggests that the Nasdaq still has some more room left to run before getting as tired as the SPX appears to be.

This is not, however, a call to become overly aggressive here. We became bullish mid-July (way too early) and remained that way straight through August and September. Now, we urge greater caution, as indices are approaching what has been key resistance in the past.

The risk reward/ratio of new trades on the long side are far less favorable today than they were only a month ago.

As the nearby chart[1] reveals, the SPX is at the top of its range. That suggests at the very least a retracement of the past 4 weeks gains is due. Our lines in the sand are as follows: A move (on big volume) over 1130 is a bullish breakout into a new trading range.

More likely is a break below 1123, suggesting a pullback towards 1105. This would be healthy for the bulls, as perhaps the indices can re-gather themselves for another run at breaking the top of that channel at 1130. The bottom of this channel is about 1050.

The rest of the evidence we track is mixed. Most of the oscillators we track are leaning overbought. The yield curve continues to flatten. On the other hand, AAII reports that individual investors have 30% of their equity portfolios in cash, versus an historical average of below 25%. This is potentially fuel for the next leg up.

At this stage of the move off of the lows, we would be cautious about getting aggressively long. We suspect there may be better entry points over the next few weeks, perhaps even in October. Core positions can be hedged via covered calls or the outright trimming of names that have had good runs.